There is no alternative country
The world is a mess right now and the US economy is not escaping pain free. But compared with the rest of the world, the USA looks pretty good.
Home buyers know to follow the rule alluded to in our headline. But buying a house is often optional. International investors however, must find a home for the cash they’ve earmarked for bonds and stocks. Let’s take a look at the options facing them:
- China is teetering on the edge of recession for the first time since it joined the world economy over 20 years ago. The real estate sector is largely bankrupt and debt levels throughout the system threaten a major dislocation. Meanwhile, sporadic Covid shut-downs aren’t helping.
- Europe is headed toward recession, but for different reasons. Russia has cut off gas supplies and coupled with extreme environmental regulation it looks like a very long and cold winter. Inflation is just as bad as here in the US, but the central bank is nine months behind the Federal Reserve in raising interest rates.
- War is denting the globalization trend, hurting emerging markets.
All this is driving the value of the dollar higher against all major and minor currencies. A 20 year low for the Euro against the dollar is the best indicator of how the financial markets view the position of the USA compared with Europe. The Japanese Yen looks the same.
All around the world businesses and governments have borrowed US dollars because the interest rate is lower than they can get in their local currency. This year all those loans have become much more expensive as the value of the dollar rises.
Meanwhile our banks are the best capitalized in the world, we continue to lead the world in innovation, and our labor market is the envy of the world.
So yes, the world is a mess, and we here in the US won’t escape unbruised, but global investors will be forced to buy our bonds and stocks given the alternatives. And the strength of the dollar suggests that they are doing just that.
Daniel A. Ogden